Canadian housing markets are still about 20% overvalued, according to Fitch Ratings, yet it expects prices to go higher in the year ahead.
In a new report, the rating agency reiterates its view that house prices in Canada are fundamentally overvalued. Nevertheless, it expects prices to rise another 2.5% in 2015 due to market momentum and underlying economic growth.
“As borrowers currently hold record levels of debt, rate increases could strain affordability, restricting house price growth and negatively impacting mortgage performance. Nonetheless, the 30 basis point rate rise Fitch projects for 2015 is not expected to have a material impact on delinquencies since the use of affordability products in the market has been limited, and borrowers have built up equity as prices have risen,” the report notes.
At the margin some buyers could find it harder to get mortgages, Fitch says, amid declining affordability, higher interest rates, and a pullback in government support for riskier lending products, “which could restrict total demand”. Yet, it’s not forecasting a crash in the Canadian housing market.
Fitch is also expecting moderate price increases for the U.S. and Mexican housing markets. It predicts that U.S. residential real estate prices will grow at approximately the rate of inflation in 2015, with regional variations. “While the housing recovery will continue to benefit from the improving economic growth and employment trends, price gains may be tempered by the low home ownership rates and the potential for modestly higher mortgage rates in the second half of the year,” it says.
In Mexico, housing demand is being driven by new borrowers, with the workforce growing 3.9% per year over the past 10 years. And, on the supply side, Fitch says that it expects government agencies and the banking sector to provide consistent credit access.
Nonetheless, the rating agency also observes that home ownership levels are continuing to drop in many countries. “As a result of market dislocations post-crisis, home ownership levels face challenges as large foreclosure pipelines are expected to displace owners in some countries such as the U.S., Spain, and Ireland, whilst new lending remains well below pre-crisis levels — particularly in the eurozone periphery,” it says. “Stretched affordability, especially in Australia and parts of the UK and a growing preference for renting, are also having an impact.”
“Tight credit availability and stretched affordability should continue to lead to falling home ownership levels in many countries around the globe with a generation of first time buyers largely priced out of the market,” it says.